OSFI – the regulator of all Canadian Financial Institutions has imposed underwriting guidelines for Residential Mortgages on all regulated lenders and CMHC. These underwriting guidelines are known as B20 and have been created at the insistence of the Financial Stability Board, the financial oversight organization of all G20 nations. The creation of these guidelines is a direct result of the financial crisis caused by poor American mortgage lending practices.
Here we will provide a brief overview of the components of B20 in general terms and explain what it means to Borrowers, Mortgage Brokers and Lenders.
Components of B20
The Guideline sets out what OSFI considers to be prudent residential mortgage underwriting standards. A residential mortgage is considered to be a loan or any other product, like a HELOC, that is secured by a residential property – up to a four-unit dwelling.
The Guideline sets 5 principles for sound residential mortgage underwriting:
- All lenders must have a policy outlining risk appetite, governance and over site mechanisms to ensure lenders follow their own policies;
- Lenders must confirm the borrower’s identity, background and demonstrated willingness to service debt obligations on a timely basis;
- Lenders must assess the borrower’s capacity to service their debt obligations on a timely basis;
- Lenders must be satisfied that the value of the property being financed has been confirmed by an independent third party; and,
- Lenders must stress test their book of business with unlikely, but plausible scenarios to determine the impact to their business. Lenders are expected to impose a higher level of due-diligence on higher risk deals, conduct ongoing risk-assessments on the insurers they use and generally pay close attention to the risk attached to their residential mortgage portfolio.
Lastly, while not one of the principles, on quarterly basis lenders must now publicly disclose their book of business by insured vs. uninsured loans, amortization buckets, average LTV at origination and provide commentary on the impact on residential mortgage loans and HELOCs in the event of an economic downturn.
The Effect on the Self Employed
For clients who are BFS (Business for Self) financing property will become more difficult. The challenge will be to confirm income levels for BFS clients that do not have traditional income confirmation documents. Brokers have always found ways to show Lenders that a Borrower is capable of paying a loan. Letters from Accountants to show income, Financial Statements, and bank statements have always been a means of doing so – this process will become far more onerous in the coming months. Lenders will look to Brokers to provide additional information, Brokers will see an influx of BFS business as clients look to maintain low interest rates when refinancing their mortgages or purchasing new property.
Our Commitment to You
As always we at MorCan will continue to ask our client – “is this mortgage payment affordable?” We will work with our valued clients to ensure that the new regulations do not simply mean higher interest rates on blended first and second mortgages.
The new guideline does state that if a lender advances a non-conforming mortgage, the LTV is limited to 65%.
A non-conforming mortgage is one where a borrower has either (or both) a lower than average beacon score and/or the borrower’s ability to service the proposed debt is in excess of our guidelines.
Defining a non-conforming mortgage beyond the above is difficult. We will work with our Valued Clients and Lender Partners to ensure the highest percentage of our applicants conform to the new B20 standards and qualify for the lowest available market rates. This can only be done by ensuring that the applications that we process have not been previously sent to Lenders. Allowing us to work on a file first will be key to efficient mortgage approval.